Profit, sales fall at leading automaker, but it confirms second-half guidance

NEW YORK (CNNfn) - General Motors Corp. reported Tuesday that second-quarter profit dropped by more than half, but the world's largest automaker still easily beat Wall Street forecasts and confirmed guidance for the second half of the year.

Hit by a cooler market for cars in the period, the company earned $610 million, or $1.26 a share, excluding special items, down from the record net income of $1.75 billion, or $2.93 a diluted share, a year earlier. Analysts surveyed by earnings tracker First Call had forecast earnings of $1.14 a share.

Including special items, net income fell to $477 million, or $1.05 a diluted share in the most recent quarter. Included in the charges was a write down of its remaining investment in Japanese automaker Isuzu, of which GM owns 49 percent, as GM's share of losses at that company now top its investment in the operations. GM said the write down does not change its relationship with Isuzu, though.

Worldwide sales fell 5 percent to $46.1 billion, as the number of vehicles sold worldwide fell 9 percent to 2.1 million from 2.4 million a year earlier. Vehicle sales fell everywhere but in Latin American, where they rose 20 percent. But economic problems now hitting Argentina put that continued growth at risk, GM said.

John DevineGM CFO sees pressure on pricing due to value of the Japanese yen versus dollar.

GM officials said that, overall, they were pleased with results, pointing to a slight gain in market share in its core U.S. retail sales, although a decision to cut sales to the rental car market resulted in an overall loss of U.S. market share during the quarter.

"It's not a great quarter from an earnings standpoint, but relative to the volume adjustment, we think not a bad one," John Devine, GM's chief financial officer, said during a conference call for analysts and reporters. (490KB WAV)(490KB AIFF)

The company said that besides the slowing market for vehicles in the United States and Europe, revenue was hit by tough competition that put pressure on prices for cars, sport/utility vehicles and minivans. The company said its net pricing, which reflects vehicle price less the cost of incentives and marketing expense, declined 0.8 percent in the period. And price pressure is likely to continue for the rest of the year, according to GM executives.

"I don't think the war is over on incentives," Devine said.

Devine said the company is being hurt by the strong value of the dollar versus the Japanese yen, which it said is allowing the automakers' Japanese competitors to cut U.S. prices and gain market share.

"We can see the strong competition we're getting is largely product driven, but the strong dollar is becoming an increasing problem for us in the marketplace," he said. "We don't want to be crybabies. We expect to and do compete in marketplace. But the strong dollar hurts produced in America, no question about that."

Still, despite the overall market declines, GM said it believes First Call's forecast of third-quarter earnings per share of 83 cents "appears reasonable" and that its EPS target for the year still stands at $4.25.

Analysts have not followed the company's full-year guidance since it was issued, and have a full-year forecast of $3.90 a share. If the company makes the 83 cents forecast in the third quarter, it would need to earn $1.65 a share in the fourth quarter to meet the company's full-year target, which would beat the consensus fourth-quarter EPS forecast of $1.51.

The new Buick Rendezvous. The majority of GM's second-quarter U.S. sales came from the light truck market, unlike a year ago when cars still were a majority of sales.

Devine conceded that losses were higher than they should be in Europe and he couldn't give a projection as to when that unit will return to profitability.

The company announced plant closing and staff cuts in Europe at the same time it dropped the Oldsmobile and announced some North American restructuring. But those changes have not gone far enough, Devine conceded, and further changes and cuts are planned. But he said he could not give any details of those future cuts.

Cars accounted for only 46 percent of GM's U.S. sales during the quarter, as it shifted production more toward the light truck segment that includes sport/utility vehicles and pickup trucks. A year ago, cars made up 51 percent of second-quarter sales. That's a shift likely to continue, as GM forecasts that light trucks' share of its U.S. sales will be in the upper-50s by the end of the year.

GM is one of six stocks in the Dow Jones industrial average that are reporting earnings Tuesday.